Marilyn Cohen, president of Envision Capital Management, says the market may have priced a downgrade in already and that the bond market will greet the downgrade news with a yawn.
We're the deepest and the largest bond market around," she says. "Investors feel we're money-good, there's no question about that. As long as you have the illusion that you're money-good while you're borrowing 40 cents on the dollar, nothing will change."
Stocks, which sold off heavily Friday as rumors swirled that a downgrade was coming, already may have factored at least some of the downgrade news into prices, others said.
Growing concerns about the state of the U.S. economy boiled over this past week, helping to send all three major U.S. equity indices down at least 5%, as Wall Street pondered whether even the sluggish growth seen so far in 2011 can be sustained.
These jitters remain, but headlines from Europe, namely worries about the stability of Italy and Spain, the continent's third and fourth largest economies, have crowded into the spotlight.
On Friday, there were reports that the European Central Bank plans to step in and buy Spanish and Italian debt, contingent on reform measures in Italy. Italy has already said that it would "accelerate measures," including balancing its budget. By next week, investors might hear more definitive plans from officials on how they'll move forward.
Whether these moves will convince investors that a potential debt contagion has been contained in Europe is yet to be seen. Barclays Capital was doubtful, saying in a report, "Europe's piecemeal approach to addressing the escalating crisis is likely to be insufficient to appease markets."
Katherine Klingensmith, strategist at UBS, says that, without clear indications from European leaders, "investors will continue to have periodic bouts of fear."
As a measure of overall risk sentiment toward Europe, Klingensmith suggests that investors watch widening spreads on Italian and Spanish bonds, as well as the value of the Swiss franc. A strengthening franc would indicate that contagion fears are still alive.
The market turmoil this past week pushed the major U.S. equity indices into correction mode -- defined as a 10% pullback from near-term highs in late April -- and it will take very strong U.S. economic data to inspire buyers.
Friday's July jobs report, which was decent but not all that impressive overall, had economists continuing the debate over whether the U.S. will slip into another recession or not. Capital Economics says the chances of a double-dip are "low" but "clearly rising." "This economic recovery will be "prolonged, painful and persistently disappointing," said the research firm.
Wall Street will find out whether the Federal Reserve has a similar take after Tuesday's meeting of the central bank's open market committee. Interest rates remaining at 0.25% for an "extended period" has become a given. The market is more interested in what the Fed has to say about the economy, including any buzz about further quantitative easing.
Most economists still think that a third round of easing would be premature. Given the weak reading on GDP growth in the first half as well as the lackluster unemployment rate at 9.1%, the Federal Reserve's forecast at the very least is expected to be more gloomy than its statement from last time.
We'll likely hear dovish language about economic softening," says Klingensmith. Short-term disruptions like poor weather conditions in the U.S. and the Japanese earthquake might get less of a mention from Fed Chairman Ben Bernanke. Meanwhile, long-term headwinds like the moribund jobs market will likely get more emphasis.
Many economists agree that the Fed will monitor the economy until September before determining if it needs to step in. With inflationary pressures still high, it would be a tough argument for intervention right now. It's also worth noting that the Fed is fighting an uphill battle more than it was during the second round of easing, since further intervention tends to have diminishing returns.
Some have speculated that Fed officials may bring down the interest rate that they charge banks for holding reserves at the central bank in order to encourage banks to put money to work. However, the effect of that is unclear given that U.S. consumers and corporations may not necessarily absorb a larger supply of money.
On the economic docket, Friday will provide good gauges on the health of the consumer sector in the form of retail sales and consumer sentiment reports.
A rebound in auto sales probably helped overall retail sales numbers in July, but core growth, excluding gas price gains and auto sale gains, will not be strong enough to drive growth aggressively, says David Semmens, economist at Standard Chartered Bank. In June, retail sales grew by a meager 0.1%.
Capital Economics pegs growth in July retail sales at 0.8%, with core growth at 0.6%.
"Until you start seeing the U.S. consumer coming back, you have to be less optimistic about outlook in the second half of the year," said Standard Chartered's Semmens
Weekly initial jobless claims will be due out Thursday. The numbers haven't shown a consistent downward trend yet. For more than three months, the number of Americans filing for first time unemployment benefits each week has floated above the 400,000 mark.
U.S. companies reporting earnings early next week include BroadSoft(BSFT), Kindred Healthcare(KND), Take-Two Interactive(TTWO), MGM Resorts(MGM), Walt Disney(DIS).
Later in the week, reports come out from Macy's(M), News Corporation(NWSA), Kohl's (KKS)and JC Penny(JCP).
At this point, there aren't too many headlines that can cure battered confidence in the market. Especially after a year's worth of gains were wiped away on the Dow on Thursday, stunned investors might think twice before betting on anything too risky.
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